Difficult as it may be to imagine in this fiscally constrained environment, there are some contrarians within industry who still believe U.S. defense spending on weapons modernization will not shrink but will hold steady and may actually expand in the next few years. They reason is that the nation’s aging military arsenal, exacerbated by the high operational tempo in Iraq and Afghanistan, combined with Iranian and North Korean threats to regional security will outweigh the pressure from Congress and the Pentagon’s civilian chiefs to cut R&D and procurement activity.
Such thoughts probably are little more than wishful thinking. As Air Force Chief of Staff Gen. Norton Schwartz indicated recently, the U.S. defense budget top line is “likely to continue to flatten,” while actual buying power decreases. The outlook among NATO allies is even grimmer.
But that’s not the only inflection point ahead from a budget perspective.
Longer term, as GDP growth in Brazil, China and India far outstrip that of the U.S. and western European countries, so too will the emerging giants’ growth rate for defense spending. Those countries did not experience nearly the impact from the global economic shock, as did the U.S. and most other industrialized countries. Their rates of growth slowed, but the never went into recession.
India, which is funneling huge amounts into defense procurement, is expected to surpass Italy and Saudi Arabia this year in defense spending, and India is projected to surpass the U.K in 2017 to become the third largest defense market in the world. Then there is China, which is tracking toward U.S. parity. Its defense spending is expected to reach half of the U.S.’s in the next 10 years, assuming no change in current spending patterns.
Given these trends, the key question for U.S. and European aerospace and defense contractors is how will business success manifest itself in transatlantic defense markets, says Ronald Epstein, an analyst with Bank of America Merrill Lynch. No doubt, business development teams on both side of the Atlantic are asking themselves that very question.
Competition from established players will be intense, and technology transfer issues could prove to be even more troublesome for U.S. companies than they are now. I could be mistaken, but from my perspective the spoils will go to contractors who have strategic partnerships down to an art form, can respond quickly to opportunities and are the most skilled at navigating the regulatory labyrinth.